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Geo-blocking

EU parliament votes in favour of geo-blocking regulation

Quick read

On 6 February 2018 MEPs finally approved the geo-blocking regulation (Regulation on addressing geo-blocking and other forms of discrimination based on customers' nationality, place of residence or place of establishment within the internal market the wording approved by the European Parliament is available at this link). The geo-blocking regulation aims to ban geo-blocking and other geographically-based restrictions, which, in the Commission's view, undermine online shopping and cross-border sales within the EU and thus the Digital Single Market.

Pursuant to the regulation, traders serving end-customers (including both B2C and B2B customers) within the EU must not discriminate in their general terms and conditions (GTCs) for reasons related to the nationality, place of residence or place of establishment (geo-factors) of the customer in specific situations. These situations refer to:

the sale of goods without physical delivery (ie retailers will not be forced to offer cross-border deliveries);

the sale of electronically supplied services (such as cloud services, web hosting, excluding, copyrighted content like films, music etc); and

the sale of services provided in a specific physical location (eg event tickets).

The regulation also:

makes it mandatory for traders (including marketplaces) to grant cross-border customers access to country-specific sites and refrain from automatic re-routing without the consent of the customer; and

limits the possibility for traders (of both goods and services) to apply different conditions for a payment transaction, for instance if the trader accepts payment by credit card, it will (under certain conditions) not be lawful to accept only credit cards issued in a certain member state.

Aside from the non-discrimination rules described above, the regulation also affects passive sales clauses, for example in distribution/licensing agreements. Passive sales clauses imposing obligations on traders to act in violation of the non-discrimination rules described above are automatically void. Further sanctions may be imposed by the member states.

Pending formal approval by the Council, the new rules will start to apply by the end of 2018. Businesses are well advised to make use of this rather short transition period to carefully assess whether geo-blocking practices are in place and if they require adjustments.

More about Geo-blocking

Geo-blocking commonly refers to practices whereby businesses either deny customers access to a website based on their location (geo-blocking), or re-direct them to another, ‘local’ website, often with different content, offering and prices (geo-filtering). Aside from access to website services, geo-blocking also describes any commercial practices whereby a customer is being treated differently based on ‘geo-factors’ (ie nationality, place of residence or place of establishment). Whereas such practices may result from unilateral decisions of the respective traders, geo-blocking sometimes is the result of bilateral arrangements, in particular of clauses in distribution/licensing agreements, pursuant to which cross-border distribution of goods or services is restricted.

Geo-blocking has been on the European legislators' radar for a while now (we describe further details on the wider EU initiatives dealing with geo-blocking in another article available on Freshfields Digital). One important part of the EU’s strategy to deal with geo-blocking is the geo-blocking regulation (Regulation on addressing geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market), which was as described above, approved by the European Parliament on 6 February 2018 (The wording approved by the European Parliament is available at this link). The geo-blocking regulation aims to ban geo-blocking and other geographically-based restrictions, which, in the Commission's view, undermine online shopping and cross-border sales within the EU and thus the Digital Single Market.

Main elements of the regulation and practical implications

The geo-blocking regulation prohibits geo-based discrimination at different stages of commercial transactions:

The geo-blocking regulation protects access to information. Customers must not be discriminated when accessing (country-specific) websites and may only be redirected to other websites if consent is given by the customers.

The geo-blocking regulation further prohibits the application of discriminatory GTCs and payment terms when selling goods/services to end-users. Traders shall not apply different GTCs (including net sales prices) or different conditions for a payment transaction for reasons related to geo-factors. However, services aimed to provide access to content protected under copyright laws (e.g. Netflix, Amazon, Sky, Spotify etc) are not covered.

Aside from these non-discrimination rules, which address unilateral geo-blocking measures, the geo-blocking regulation also addresses bilateral geo-blocking measures: It renders passive sales clauses automatically void, if these clauses impose obligations on traders to act in violation of the regulation’s non-discrimination rules.

In more detail

The regulation makes it mandatory for traders (including marketplaces) to refrain from blocking/limiting cross-border customers’ access to the traders’ (country-specific) online interfaces and further refrain from automatic redirecting without the consent of the customer.

Online interfaces include a website (or a part thereof) and applications, including mobile applications which serve to give customers access to the trader’s goods or services with a view to engaging in a commercial transaction with respect to those goods or services.

The prohibitions set out in Article 3 of the regulation shall not apply where blocking/re-directing is necessary in order to ensure compliance with a legal requirement in EU law or in the laws of a member state. However, in this case a clear and specific explanation must be provided to customers.

The geo-blocking regulation prohibits discrimination in GTCs between customers for reasons related to the nationality, place of residence or place of establishment of the customer in specific situations concerning the sale of physical goods and the supply of services as explained below.

Sale of goodswithout physical delivery: Traders will not be allowed to treat customers from other member states differently in their GTCs (including net sale prices), but they won’t be forced to deliver across borders under the regulation. A trader who has decided to deliver only domestically can continue to do so under the regulation. But customers from other member states may still order goods, provided that they can provide a delivery address in the trader’s member state or agree to pick up the goods there (if the trader offers a pick-up option). If, for example, a trader based in Germany operates a web shop for physical goods and offers delivery of these goods only to Germany, the geo-blocking regulation would not require the trader to offer delivery to other countries. If, however, a customer residing in the Netherlands (or any other member state country) orders goods via the web shop and is able to provide a delivery address in Germany (or is able to arrange delivery in accordance with the trader’s existing shipping terms), the trader would not be allowed to apply different prices solely for the reason that the customer is resident in the Netherlands (or any other member state).

While ‘savvy’ customers may in theory be able to obtain products from other member states’ shops, given the requirement for these customers to arrange shipping, it seems questionable whether this could become a widespread practice in the internal market. There may be an incentive for logistics providers to offer innovative cross-border delivery services, which seems to be one of the reasons why the Commission also proposed a regulation to facilitate better and cheaper cross-border parcel delivery services.

Supply of services: Providers of electronically supplied services such as data warehousing, website hosting, remote system administration, installation of filters, firewalls, banner-blockers and so forth will be able to continue to apply different GTCs (including net sale prices) only if such differences are not solely based on geo-factors. This means that any differentiation must be otherwise justified – if not, service providers may as a result have to provide uniform terms (including net prices) to all of their (cross-border) EU customers in their GTCs.

The same is true in respect of services, excepting electronically supplied services, which are provided by a trader in a physical location within the territory of a member state where the trader operates. This includes services such as hotel accommodation, sport events and entry tickets to music festivals or leisure parks.

Exception for copyrighted content: A contentious issue was whether the regulation should also apply to content protected under copyright. In the end, such digital copyrighted services have been excluded from the scope of Article 4, as the Commission had originally intended. Including digital content services would have meant that customers would be free to choose which country-specific offering of platforms like Netflix or Spotify they subscribe to, significantly impacting the content industry's freedom to provide country-specific offerings in relation to content and pricing. This exclusion is, however, not set in stone: the regulation foresees that the Commission should review this exclusion and report by 2020 on whether copyrighted content should be included in the scope of the regulation.

Other than in relation to the sale of (physical) goods, for which there is no cross-border delivery obligation, the practical effect of the regulation could be significant in the relevant parts of the service industry. Customers will be able to obtain such services – including some content services – from other member states’ shops on the same terms offered to ‘local’ customers. Price differentiation could become more challenging and may ultimately lead to a harmonisation of pricing. This will benefit the ‘savvy’ customer who takes the effort to compare prices and may spark new services for cross-border price comparisons.

The regulation limits the possibility for traders (of both goods and services) to apply different conditions for a payment transaction for reasons related to geo-factors (including the location of the payment account, the place of establishment of the payment service provider or the place of issue of the payment instrument). This rule applies, however, only in case specific pre-conditions are met, in particular if the payment transaction is made through an electronic transaction, strong customer authentication is available and the payment transactions are in a currency that the trader accepts.

Traders shall remain free to decide which means of payment they accept. But once this choice has been made, traders should not otherwise discriminate.

Aside from the non-discrimination rules described above the regulation also affects passive sales clauses (eg in distribution/licensing agreements). Pursuant to the regulation passive sales clauses, which impose obligations on traders to act in violation of the non-discrimination rules described above, shall be automatically void.

Thus, in practice, restrictions on passive sales should not only be assessed from a competition law perspective, but also in consideration of the geo-blocking regulation. The relevant article of the regulation (Article 6) shall apply from 24 months from the date of entry into force of the regulation, in respect of provisions of agreements concluded before the date of adoption which are compliant with Article 101 TFEU and any equivalent rules of national competition law. This would give businesses a bit more time to re-structure existing agreements.

Further aspects to be considered

Given that the regulation in particular aims to clarify certain situations where different treatment cannot be justified under Article 20(2) of the Services Directive, the regulation’s scope has been aligned with the scope of the Services Directive. As a result, quite significant service industries (eg financial, transport, electronic communication, healthcare and audio-visual and broadcasting services) are not covered by the regulation.

Whereas the exclusion of B2B transactions from the scope of the regulation was debated in the course of the legislative procedure, the final regulation does include both consumers and undertakings within the EU, however, only if they receive a service or purchase a good, or seek to do so, for end use.

The regulation also clarifies that a trader’s mere compliance with the regulation shall not be construed as implying that a trader directs his or her activities to the member state where the consumer has the habitual residence or domicile.

What action do businesses need to take?

The geo-blocking regulation raises a number of questions.

Are geo-blocking practices in place (eg auto-forwarding of customers in online shops, application of different pricing or refusal of foreign credit cards based on the customer’s nationality, place of residence or temporary location) or agreed to (eg passive sales clauses implementing geo-blocking obligations in distribution agreements)?

If yes, are these practices and/or obligations covered by the respective laws on geo-blocking (eg addressed to end-user within the EU)?

If yes, can these practices be justified under the current and new legal regime (eg blocking of users from access to websites due to EU/national law)?

If not, is it necessary to modify the online interface mechanisms and processes (blocking/auto-forwarding on websites/online shops), respective terms and conditions and/or distribution agreements?

Pending formal approval by the Council, the new rules will come into force by the end of 2018. Thus traders are well advised to make use of this rather short transition period and carefully start to assess whether geo-blocking practices falling under the scope of the regulation are in place or agreed to, and, if yes, readjust their terms and sales organisation accordingly.